Will the Community Bank Crunch Squeeze Small Business? How to Find Out

If your small business has received loans or lines of credit from a community bank—or was hoping to do so—you might find it becoming more difficult. Inc. recently reported on a coming crunch that is hitting community banks, with possible ill effects for small business owners who depend on those banks for capital.

The problems stem from the Troubled Asset Relief Program (TARP) which gave banks nationwide funds from the U.S. Department of the Treasury that had to be paid back with interest. While Inc. reports that the nation’s larger banks have already paid back their TARP debt, about 300 community banks across the country haven’t yet done so.

The Treasury Department is winding down the TARP program, raising interest rates for banks that still have outstanding debt to pay back. These banks are being hit with a perfect storm: In addition to the need to pay back principal and higher interest, new federal regulations as a result of the Dodd-Frank Act require community banks to have more available cash for emergencies.

The result? Many community banks are being forced to cut back on lending to small business in order to handle their TARP responsibilities and have enough cash. That’s bad news for small businesses, which rely greatly on community banks for their capital needs.

Inc. cites FDIC data that smaller banks (those with $5 billion or less in assets) made $336 billion in small business loans in the first quarter of this year. By comparison, banks with $5 billion or more in assets made loans of $311 billion to small businesses. Small business loans account for nearly one-fourth of all loans by community banks, compared to just 5 percent of bigger banks’ lending.

How can you know if your bank will be affected by this issue? The best way is to talk honestly with your banker. Ask whether the bank accepted TARP funds and, if so, whether they have paid the money back. If not, try to get the banker’s take on how this responsibility will affect future loans to small business.

Even if your bank is not affected by TARP, be aware that small business owners whose own banks are cutting back on lending may start approaching your bank for loans. In other words, if you were considering applying for a loan or line of credit, the time to act is now.